Costs soar for reinsurers
As a result of the re-rating, Australian insurers have to pay more for reinsurance, costs they will pass on to customers. "Those [reinsurance] premiums have increased in some cases by as much 50 per cent," Mr Whelan said.
Insurers have sparked anger from many policyholders asked to cop sharp increases in premiums. Data from the Australian Prudential Regulation Authority indicate premiums for domestic home and contents coverage rose 16.4 per cent in the 12 months to the end of last September and 13.9 per cent for commercial property insurance.
Flood coverage premiums have soared, with increases of 300 per cent or more prompting holders in flood-risk areas to drop the option.
Mr Whelan defended the tougher line on flood insurance. "Insurers must rate to risk," he said. "If they don't, they have a real difficulty in terms of solvency."
Insured losses from the former tropical cyclone Oswald now exceed $732 million, with claims totalling 70,000, the bulk of which are in Queensland and the remainder in New South Wales.
While the losses remain a fraction of the $2.5 billion from the 2011 Queensland floods, the tally will rise. It also excludes losses from bushfires, which are also certain to increase as Victorian and West-Australian authorities battle blazes amid dry conditions in what may be Australia's hottest summer in more than a century of records.
Heinrich Eder, managing director of Munich Re for Australasia, said January's disasters show "the vulnerability of Australia" to natural perils, "especially weather-related catastrophes". Such events had more than tripled in the past three decades "and this trend is most likely to continue", he said.
Rival Swiss Re concurs. "When natural catastrophes happen, the insurance industry uses the claims data to update the models used to assess and price risk," a spokeswoman for the re-insurer said. "This has been happening in Australia in the wake of the significant insurance losses of recent years."
In its submission to the Senate inquiry into preparedness for extreme weather events - which holds its first hearings in Melbourne on Wednesday - IAG says rainfall analysis suggests "an increased frequency of major river flooding in a fairly large area" of central WA and the region taking in central South Australia, south-west Queensland and inland NSW "for the warmer part of the year in the future".
Addresses with "extreme" risk from floods number 3860 in NSW, 51,506 in Queensland, 10,239 in Victoria, 49,576 in South Australia, 10,000 in WA and 4100 in Tasmania, IAG said, citing figures from the National Flood Insurance Database.
More than 711,000 properties are within three kilometres of the coast and below six metres elevation "which are vulnerable to coastal hazards", IAG said, with 60 per cent in NSW and Queensland.
The April 14, 1999 hailstorm in Sydney remains the largest single catastrophe, costing $4.3 billion in 2011 "normalised" dollars, according to the Insurance Council. IAG's meteorology team estimates the city "could see a doubling of hailstorms with hailstones greater than 10 centimetres in diameter in the greater Sydney region over the next 50 years," the insurer told the Senate inquiry.
While there is scope for cutting stamp duty and taxes on insurers, efforts to mitigate against hazards such as floods - think levees - were the best near-time hope to bring down premiums, insurers said.
The insurers are yet to lose favour with investors despite Australia being judged a higher risk.
QBE shares are up 24 per cent this year, while IAG stock has advanced 10.6 per cent and Suncorp 10.2 per cent. The S&P/ASX 200 Index has risen 8.3 per cent.
Frequently Asked Questions about this Article…
Reinsurance costs have risen because another summer of flooding and extreme weather raised Australia’s peril profile, prompting international reinsurers to re-rate the market. The Insurance Council says some reinsurance premiums have increased by as much as 50%, while reinsurers such as Munich Re and Swiss Re point to a clear increase in weather-related catastrophes and updated risk models.
Insurers typically pass higher reinsurance costs on to customers, which helps explain recent premium increases. APRA data cited in the article shows domestic home and contents premiums rose 16.4% in the 12 months to last September and commercial property insurance rose 13.9%; flood cover increases have been far larger in some areas.
The article reports flood coverage premiums have surged by 300% or more in some cases, prompting many policyholders in flood-risk areas to drop flood cover because it became unaffordable or unattractive at those prices.
Insured losses from tropical cyclone Oswald now exceed $732 million with about 70,000 claims mostly in Queensland and some in New South Wales. The article also references ongoing bushfire losses and past large events such as the 2011 Queensland floods ($2.5 billion) and the 1999 Sydney hailstorm (about $4.3 billion in 2011 normalized dollars).
IAG’s submission highlights increased river-flooding risk in parts of central Western Australia, central South Australia, south‑west Queensland and inland New South Wales for the warmer part of the year. The National Flood Insurance Database figures cited show tens of thousands of addresses at 'extreme' flood risk by state, and more than 711,000 properties are within three kilometres of the coast and below six metres elevation (about 60% of those in NSW and Queensland).
Insurers say there is scope to reduce costs by cutting stamp duty and taxes on insurers, but practical hazard mitigation—such as building levees and other flood defences—is the best near-term way to bring down premiums by reducing actual risk exposure.
Munich Re’s Australasian managing director, Heinrich Eder, said January’s disasters showed Australia’s vulnerability and that weather-related catastrophes have more than tripled in the past three decades, a trend likely to continue. A Swiss Re spokeswoman added that the industry uses claims data from natural catastrophes to update models used to assess and price risk.
Despite Australia being judged a higher risk by reinsurers, insurer shares remained in favour: QBE was up 24% year-to-date, IAG up 10.6% and Suncorp up 10.2%, compared with the S&P/ASX 200’s 8.3% rise. For everyday investors, that highlights that share performance can diverge from rising underwriting costs, but the article also notes insurers must 'rate to risk' to protect solvency—so reinsurance and claims trends are important factors to watch.
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